If you work as an importer or exporter, with multiple global businesses, or even with just a handful of local Australian companies, you may be wondering if trade credit insurance is worth it for your company. In this article, we’ll explore this subject in depth, and discuss some of the issues and consequences that may arise if you’re not properly protected with an export credit insurance policy.
Understanding The Basics About Trade Credit Insurance
Essentially, a trade credit insurance policy protects your accounts receivables, in the event that one of your clients or customers has failed to pay. Rather than being forced to use debt collection services to try and recoup your money, you simply file a claim with your insurance company.
Then, they reimburse you if your client fails to pay, similar to how export credits work in OECD countries. You’ll get a certain percentage of the value of your invoice, allowing you to maintain steady cash flow and profitability.
The Consequences Of Not Having Trade Credit Insurance
The cost of trade credit insurance may seem high, particularly if you have not had issues with customers failing to pay in the past. But the credit risk of failing to get a policy is much higher. Here are just a few of the issues you may face if you don’t have trade credit insurance.
- Loss of profit – You’ll immediately lose a huge portion of your profits, due to the failure of the other party to pay. You may have difficulty pursuing legal action, as well, particularly if you’re exporting to foreign countries.
- You must pursue bad debt on your own – Hiring international collections agency is expensive, and you’re not guaranteed to be successful, so this can further impact your bottom line, and lead to loss of profitability.
- Restricted cash flow – Your loss of profit leads to loss of working capital and cash flow, meaning you can’t continue to expand your company at a rapid pace, which means you could miss out on enormous potential profits.
- Fewer potential customers, particularly in developing nations – Without trade credit insurance, exporting to a new customer is extremely risky. If they don’t pay, you may not have proper recourse to get your money. This means you won’t be able to take the risk and expand, even if there are hundreds of potentially reliable customers in these countries.
- Potential bankruptcy – If you can’t weather the loss of a significant profit from a single invoice or multiple invoices failing to be paid on time, your company could go bankrupt. This is more common than you may think.
These are just a few of the potential consequences of failing to insure yourself with a trade credit insurance policy.
Trade Credit Insurance Is The Best Way To Protect Yourself
There’s a reason that almost all major companies use trade credit insurance, and that global trade insurance companies like Euler Hermes continue to grow. For risk management in both foreign and domestic trade, trade credit insurance is absolutely indispensable.
With a trade credit insurance policy, you can protect yourself and your balance sheet form bad debt, become more competitive in the world of global trade, and protect yourself from political risks.
Whether a client has failed to pay due to bankruptcy, political instability, or for any other covered reason, you can turn to your trade credit insurance policy, and recoup most of the money you lost, allowing you to reduce your levels of risk, and maintain your cash flow, even if a catastrophic event occurs.
Compared to the benefits that it offers, trade credit insurance cost is quite reasonable – and because your premiums are calculated as a percentage of your balance sheet, the cost will be lower for small companies, and scale as you continue to increase your profits.
Contact Niche Trade Credit Now To Learn More About Our Policies
At Niche Trade Credit, we specialise in trade credit insurance services and political risk insurance. We can help you protect your company and your profits when working with both international and domestic clients. Contact us today to learn more.
*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.